US economy growth rate misses expectations

US economic growth gained speed to an annual rate of 2.5 percent in the first quarter, but not enough to meet forecasts made by economists.

The Commerce Department said on Friday that gross domestic product (GDP) expanded at a 2.5 percent annual rate, after growth nearly stalled at 0.4 percent in the fourth quarter.

However, the increase missed economists’ expectations for a three percent growth pace.

“It wasn’t the bang-up start to the year we had hoped for, and the signals from March suggested that we will only decelerate from here into the spring trimester,” said Avery Shenfeld, chief economist at CIBC World Markets Economics in Toronto.

Part of the acceleration in activity reflected farmers’ filling up silos after a drought last summer decimated crop output. Removing inventories, the growth rate was a tepid 1.5 percent.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.2 percent pace – the fastest since the fourth quarter of 2010. It grew at a 1.8 percent rate in the fourth quarter of last year.

However, households cut back on saving to fund their purchases after incomes dropped at a 5.3 percent rate in the first quarter. The drop in income was the largest since the third quarter of 2009.

The saving rate fell to 2.6 percent, the lowest since the fourth quarter of 2007, from 4.7 percent in the fourth quarter of 2012.

Monetary stimulus

The GDP report could give ammunition for the Federal Reserve to maintain its monetary stimulus.

The US central bank, which meets next week, is widely expected to keep purchasing bonds at a pace of $85bn a month.

Although government spending, which fell to a 4.1 percent annual rate, tax increases and federal budget cuts could slow growth later this year.

Data ranging from employment to retail sales and manufacturing weakened substantially in March after robust gains in the first two months of the year. There are indications the weakness persisted into April.

The GDP report showed contributions to growth from all areas of the economy, with the exception of government, trade and investment by businesses in offices and other commercial buildings.

Homebuilding growth

Much of the gains in first-quarter spending came from car purchases and outlays for utilities, which were boosted by unusually cold temperatures.

Consumers managed to step up their spending despite the return of a two percent payroll tax and higher petrol prices.

Despite the spike in petrol prices, inflation pressures were benign in the first three months of the year.

An inflation gauge in the government’s GDP report rose at a 0.9 percent rate, the smallest increase since the second quarter of 2012. The personal consumption expenditure index had increased at a 1.6 percent pace in the fourth quarter.

Business spending on equipment and software slowed sharply, growing at an only three percent rate after a brisk 11.8 percent pace in the fourth quarter.

Homebuilding marked an eighth straight quarter of growth, though the pace moderated from the fourth quarter.